Chapter Two: The Basic Financial Statements

Accounting

The process of recording, classifying, and summarizing economic events to prepare financial statements

GAAP

Generally accepted accounting principles; the shared rules for when and how to record and report financial activity

FASB

Financial Accounting Standards Board; sets GAAP for companies and non-profits

GASB

Governmental Accounting Standards Board; sets GAAP for state and local governments

FASAB

Federal Accounting Standards Advisory Board; sets accounting standards for the federal government

Fundamental accounting equation

Assets = Liabilities + Net Assets

Asset

Anything of value the organization owns

Current asset

An asset expected to be sold, used, or converted to cash within one year

Long-term (non-current) asset

An asset used over multiple years, such as buildings, equipment, and infrastructure

Liability

Anything the organization owes to others

Current liability

A liability expected to be paid within the next fiscal year, such as accounts payable or wages payable

Long-term liability

A liability due beyond the current fiscal year, such as loans, bonds, or pension obligations

Net assets

What remains after liabilities are subtracted from assets; an indicator of financial strength

Receivable

Money owed to the organization that it expects to collect

Pledge receivable

A donor's commitment to give at a future date

Balance sheet

A snapshot of assets, liabilities, and net assets on one date; called the Statement of Financial Position (non-profit) or Statement of Net Position (government)

Income statement

Summarizes revenues, expenses, and the change in net assets over a period; called the Statement of Activities for non-profits and governments

Cash flow statement

Shows how an organization receives and uses cash; sections are operations, investing, and financing (OIF)

Statement of functional expenses

Non-profit statement splitting expenses into program, management and general, and fundraising

Program expense ratio

Program expenses divided by total expenses; shows how much spending goes directly to the mission

Liquidity

How quickly an asset can be converted to cash

Working capital

Current assets minus current liabilities; a measure of short-term financial position

Historical cost rule

Assets are recorded at their purchase price, minus depreciation, rather than current market value

Depreciation

The loss in value of an asset from use; an expense that involves no cash payment

Fair value

The observable market price; used for investments instead of historical cost

Allowance for uncollectible accounts

A reduction to receivables for amounts the organization expects not to collect

Net assets without donor restrictions

Net assets the organization can use for any purpose, including short-term needs

Net assets with donor restrictions

Net assets limited by donor-imposed time or purpose conditions

Net assets released from restrictions

A reclassification from restricted to unrestricted once the donor's intent has been satisfied

In-kind contribution

Donated goods or services rather than cash

Endowment

Donor-restricted funds whose investment earnings support the organization

Notes to the financial statements

Narrative explanations of accounting assumptions, policies, and unusual transactions

Audit report

An external auditor's opinion on whether the financial statements are a fair presentation

Unqualified opinion

The clean audit result; the statements are fairly presented in all material respects

Indirect method

Cash flow from operations starts with the change in net assets and adjusts for non-cash items

Accrual basis

Records a transaction when it has economic impact, whether or not cash moves

Modified accrual basis

Short-term accounting used for governmental funds; revenue counts when measurable and available within about 60 days

Fund

A stand-alone, self-balancing set of accounts with a specific purpose

General Fund

The government fund for core services paid by general revenues; usually the largest and most watched

Governmental funds

Funds for core government services: general, special revenue, debt service, capital projects, and permanent funds

Proprietary funds

Funds for business-type activities financed by fees, such as water and sewer utilities

Fiduciary funds

Funds holding resources for outside parties, which the government cannot spend on its own programs

Internal service fund

A fund serving other departments of the same government, such as fleet or self-insurance

Fund balance

Assets minus liabilities (net of deferrals) in a governmental fund; the most closely watched number in government accounting

Non-spendable fund balance

Fund balance not available to spend in the next period, such as inventory or endowment principal

Restricted fund balance

Fund balance limited by law, the constitution, or an outside funder

Committed fund balance

Fund balance set aside by formal action of the governing body

Assigned fund balance

Fund balance earmarked by management without governing body approval; more flexible

Unassigned fund balance

Fund balance with no restrictions on use

Net position

Government version of net assets; assets plus deferred outflows minus liabilities and deferred inflows

Net investment in capital assets

Capital assets minus depreciation and minus the debt used to acquire them

Deferred inflow of resources

Resources received in advance in a non-exchange transaction, such as prepaid property taxes

Deferred outflow of resources

A future resource commitment recognized in advance, such as a pension payment due after year end

Unearned revenue

Money received for services the government has not yet delivered

Net pension liability

Promised retirement benefits that exceed the pension plan's assets

OPEB

Other post-employment benefits; non-pension retiree benefits, mainly healthcare

Governmental activities

Government activities supported by taxes and other non-exchange revenues

Business-type activities

Government activities supported mainly by user fees, like utilities and golf courses

Component unit

A legally separate entity for which a government is financially accountable

Inter-period equity

The idea that a balanced budget keeps a government from pushing costs onto future generations

Fiscal accountability

A government's responsibility to show it raised and spent public money as publicly decided

Operational accountability

How efficiently and effectively an organization uses resources to advance its mission

Interfund transfer

Movement of resources from one fund to another; can obscure a government's true financial position

Expenditure

The modified accrual version of an expense, recognized when costs are incurred in the current period

Other financing sources

Inflows and outflows that affect fund balance but are not revenues or expenditures, such as bond proceeds

Major fund

A fund important enough, or large enough by set thresholds, to be reported separately

GASB 34

The standard requiring governments to report the book value of capital assets such as roads and bridges